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ISLANDS, INDEXATION AND MONETARY POLICY
Author(s) -
Vanhoose DAVID D.,
Waller CHRISTOPHER J.
Publication year - 1989
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1989.tb00797.x
Subject(s) - indexation , economics , wage , monetary policy , aggregate demand , aggregate supply , monetary economics , demand shock , supply shock , inflation (cosmology) , aggregate (composite) , supply and demand , macroeconomics , microeconomics , econometrics , labour economics , physics , materials science , composite material , theoretical physics
This paper develops a synthesized macroeconomic model that incorporates the local‐global informational asymmetries of an “islands” economy into a setting characterized by endogenous wage indexation. In such an economy, agents are unable both to filter out the separate influences of demand and supply shocks on observed output prices and to distinguish between the separate price effects of local and aggregate disturbances, so that optimal wage indexation depends upon both the variances of supply and demand disturbances and the information‐conditioned forecasts of agents. As a result, optimal monetary policy generally depends upon the variances of local and aggregate supply and demand.